The IRS generally recognizes two methods of tax-free distribution from an
HSA:
- ·
using a debit card or similar instrument to
directly pay for medical expenses, and
- ·
taking a distribution to repay yourself for
medical expenses that you have already paid out of pocket. See “Distributions From
an HSA” in Publication
969.
Using the debit card provides a paper trail for your medical expenses;
however, since reimbursing yourself does not do so automatically, you are
required to keep the documentation showing the amount you spent out of pocket
on qualified medical expenses and the corresponding distribution to yourself to
repay yourself.
An HSA is similar to an IRA. If you take money out of an IRA, it’s
considered taxable income, even if it’s still sitting in your checking account unspent.
The same applies to an HSA. You can’t take money out of an HSA in the
expectation that some day you will spend it on medical expenses.
In your case, especially, the year ended without you spending the
distribution on qualified medical expenses; that makes the whole amount less
the $25 taxable.
